Fraud Friday: The Room Where It Happens

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Today’s Fraud Friday has a theme: Public-Sector Shenanigans.

Given the subject, it seems most appropriate to quote the ol’ Ten Dollar Founding Father himself, A. Ham, from The Works of Alexander Hamilton, (Federal Edition), vol. 3 [1791]: Hamilton was nothing if not verbose, and the prose here is, let’s be honest, very purple. But damn if he doesn’t nail the human condition:

“With some men the hardest thing to forgive is the demonstration of their errors,—the manifestation that they are not infallible. Mortified vanity is one of the most corroding emotions of the human mind; one of the most unextinguishable sources of animosity and hatred.

It was equally to have been foreseen, that personal disappointments would be likely to alienate from the government some individuals who had at first advocated its adoption, perhaps from motives not the most patriotic or commendable; that personal rivalships and competitions would throw others into an opposition to its measures, without much regard to their intrinsic merits or demerits; and that a third class would embrace the path of opposition as the supposed road to popularity and preferment, raising upon every colorable pretext the cry of danger to liberty, and endeavoring to disseminate among the people false terrors and ill-grounded alarms.

Phenomena like these have deformed the political horizon, and testify the depravity of mankind, in all countries and at all times.

It was likewise to have been expected that among the well-meaning friends of the government, there would be a part, competent to the proper management of the affairs of the Union, who, sensible from experience of the insufficiency of the former system, gave their assent to the substitute offered to their choice, rather from general impressions of the necessity of a change, than from an accurate view of the necessary compass of the authorities which ought to constitute it.

When they came to witness the exercise of those authorities upon a scale more comprehensive than they had contemplated, and to hear the incendiary comments of those who will ever be on the watch for pretexts to brand the proceedings of the government with imputations of usurpation and tyranny, and the factious and indiscreet clamors of those who, in and out of the Legislature, with too much levity, torture the Constitution into objections to measures which they deem inexpedient;—it was to have been expected, I say, that some such men might be carried away by transient anxieties and apprehensions, and might for a moment add weight to an opposition which could not fail to grow out of other causes, and the real objects of which they would abhor.

There is yet another class of men, who, in all the stages of our republican system, either from desperate circumstances, or irregular ambition, or a mixture of both, will labor incessantly to keep the government in a troubled and unsettled state, to sow disquietudes in the minds of the people, and to promote confusion and change. Every republic at all times has its Catilines and its Cæsars.

Men of this stamp, while in their hearts they scoff at the principles of liberty, while in their real characters they are arbitrary, persecuting, and intolerant, are in all their harangues and professions the most zealous; nay, if they are to be believed, the only friends to liberty. Mercenary and corrupt themselves, they are continually making a parade of their purity and disinterestedness, and heaping upon others charges of peculation and corruption. Extravagant and dissipated in their own affairs, they are always prating about public economy, and railing at the government for its pretended profusion. Conscious that as long as the confidence of the people shall be maintained in their tried and faithful servants, in men of real integrity and patriotism, their ambitious projects can never succeed, they leave no artifice unessayed, they spare no pains to destroy that confidence, and blacken the characters that stand in their way.

Convinced that as long as order and system in the public affairs can be maintained, their schemes can never be realized, they are constantly representing the means of that order and system as chains forged for the people. Themselves the only plotters and conspirators, they are for ever spreading tales of plots and conspiracies; always talking of the republican cause, and meaning nothing but the cause of themselves and their party; virtue and liberty constantly on their lips, fraud, usurpation, and tyranny in their hearts.

Couldn’t have said it better myself, Ham-bone. Food for thought. Now, let’s get on with the show!


Israeli Prime Minister Benjamin Netanyahu indicted on charges of bribery, fraud, breach of trust (Washington Post)

“JERUSALEM — Prime Minister Benjamin Netanyahu was formally charged with bribery, fraud and breach of trust on Thursday, making him the first Israeli premier to be indicted while in office and sending Israel’s already stalemated political system into further disarray.

Israeli Attorney General Avichai Mandelblit capped almost three years of investigation and months of speculation by issuing a 63-page indictment against the country’s longest-serving prime minister and its center of political gravity for the last decade.

The cases against Netanyahu center on allegations that the prime minister and his wife, Sara, accepted more than $260,000 worth of luxury goods in exchange for political favors and that Netanyahu interceded with regulators and lawmakers on behalf of two media companies in exchange for positive news stories.

Netanyahu, 70, has steadfastly denied wrongdoing during a wide-ranging probe that he has dismissed as a politically motivated ‘witch hunt.'”

Hmmmm…That last sentence sounds…familiar.


Former Baltimore Mayor Pleads Guilty to Fraud and Tax Evasion Charges (CBS News)

Former Baltimore Mayor Catherine Pugh pleaded guilty Thursday to four charges of federal conspiracy and tax evasion in the ‘Healthy Holly’ book scandal. In the 11-count indictment unsealed Wednesday, prosecutors said Pugh defrauded purchasers of her self-published ‘Healthy Holly’ children’s book series and used the money to fund her mayoral campaign.

Pugh, 69, pleaded not guilty to seven other charges involving wire fraud. 

In court on Thursday, Hugh showed little emotion as she admitted to taking $100,000 from a connected businessman under the guise of ‘Healthy Holly’ payments to buy herself a bigger house for entertaining once she became mayor, CBS Baltimore reported.  She also admitted to funneling ‘Healthy Holly’ money to her campaign out of fear she’d appear desperate if the public learned she was giving so much money to her campaign.

Pugh faces 35 years in prison. She is set to be sentenced in February. 

U.S. Attorney Robert Hur said Pugh’s guilty plea shows she betrayed the trust placed in her by the public.

Well, Mayor Pugh will have plenty of time to get healthy in the fedeal pen, it would appear…


Mayor of Muncie, Indiana, indicted for allegedly accepting $5,000 bribe (CNN)

“Dennis Tyler, the Democratic mayor of Muncie, Indiana, was indicted Monday on a charge of accepting a $5,000 bribe, according to the US Attorney’s Office.
Tyler accepted the bribe in exchange for awarding contracts to a company from Gaston, Indiana, that performs demolition, excavation and construction projects for Muncie, according to the indictment. The mayor faces up to 10 years in federal prison if convicted.
‘Tyler not only betrayed the trust of his community, but violated federal law, and all in an effort to serve his own personal interests,’ said Josh J. Minkler, acting US attorney for the Southern District of Indiana.
Authorities arrested Tyler, 76, at his home Monday morning, according to the FBI.
He is currently in FBI custody, according to Chris Bavender, spokeswoman with the FBI in Indianapolis. Tyler made a court appearance Monday afternoon in a federal courtroom in Indiana, a US Attorney’s office news release said.
CNN has reached out to Tyler’s attorney, but has not heard back.
Tyler’s arrest is part of a ‘multi-year and on-going investigation’ by the FBI and Internal Revenue Service looking into the payment of kickbacks in exchange for public works projects and other corruption-related matters in Muncie, the release said.”

$5K? That’s all this dude could shake down out of a crooked contractor? It’s a sad day in Whoville when people are willing to go to prison for a bribe that won’t even buy a decent Hawaian vacation or pay off a season’s worth of football bookie debt…

Alright, until next time. Have a great Thanksgiving and don’t get trampled on Black Friday!

Whistleblower Wednesday – Inspector’s General & Defending the Rule of Law in our Republic

Welcome to a new (semi)regular series – Whistleblower Wednesday. I can hardly think of a better day to kick this one off. Truth is stranger than, well, any episode of The West Wing ever aired.

If there is a single non-political takeaway that is relevant to the audit/investigation community from the past few days, it’s that many, many, MANY people have no idea how the concept of whistleblowing and independent public investigative functions are supposed to work.

Rather than a long-winded exposition from me on the philosophical concepts of morality/ethics/freewill and the duty individuals have to protect organizational integrity, I’ll just share a link to one of my favorite websites, www.oversight.org, managed by the association of Inspectors General. COGIE have produced an outstanding free informational publication, Whistleblowing Works: How Inspectors General Respond to and Protect Whistleblowers that lays out all the basic principles. If you’re not familiar with it, I highly suggest downloading it and giving it a thorough review. If you ARE familiar with this world, but get frustrated trying to explain it to non-audit/investigative professionals, point them to this document.

Regardless of how this whole mess plays out politically, it’s clear that, once again, auditors and investigators are being called to defend the rule of law upon which our republic is based. Without that, we are just a kleptocracy on a long, slow, painful decline.

Fraud Friday: “Inception” Bank Fraud, Cryptocurrency Vanishes, College Admissions Fraud

Greetings from the hazy heat of Summer here in the American Middle West. While it came late after a very wet Spring, it’s finally arrived in all its ridiculously humid glory. Fireflies are cool, though…anyway, one thing that never took a break was fraud, so here we go…


Bank manager hid employee’s fraud to hide his own $500,000 fraud, police say

A senior manager at the Commonwealth Bank, who stole almost half a million dollars, failed to report a member of his team for fraudulently transferring an alleged $64,000 to her personal account, lest his own fraud be discovered, police allege.

Lee Zaragoza, a self-described ‘results driven’ senior manager in the bank’s payment operations unit, is accused of funding a gambling habit by redirecting $463,240 from the bank into his own personal account between 2013 and 2018.” – Sydney Morning Herald

I love it – “results driven.” Yeah, the only result from you being a first-class asshole, Mr. Zaragoza, is that YOU’RE now going to jail, along with your fellow embezzling senior manager. It’s like the movie “Inception,” where everything is a crazily-related M.C. Escher-esque house of mirrors. This kind of situation actually happens more than one might think, particularly in organizations without a strong sense of ethics or a poor or dishonest managerial culture.


Where’d Your Bitcoin Go, Bro?

Losses from the theft of cryptocurrencies from exchanges and fraud-related activities surged in the first quarter of the year to $1.2 billion, or 70 percent of the level for all of 2018, cybersecurity firm CipherTrace said on Tuesday.” – Reuters

Shocking – shocking, I tell you: A bunch of criminal hackers invent a virtual form of money, and then use their superior technical skills to use that invention as an efficient method for separating the stupid from their cash.

Two years ago, I was getting yelled at online for being skeptical about the Bitcoin Bubble. Anyone who questioned the safety and security of blockchain-based cryptocurrencies was shouted down and branded a Luddite, and those without a blind self-interest in profiting from a bunch of suckers got badgered into silence. Well, the separation of idiots from their funds appears to be continuing apace…


Long before college admissions scandal, universities saw signs of fraud on campus

More than a year before the college admissions scandal investigation began, Georgetown University “discovered irregularities” in the athletic credentials of two tennis recruits, initiated a secret investigation and eventually forced coach Gordon Ernst to resign, court records show. University officials say those two athletic recruits were denied admission.

But none of Ernst’s conduct would become public until he was arrested in March on charges he accepted $2.7 million in bribes between 2012 and 2018. He has pleaded not guilty to racketeering conspiracy.” – LA Times

Once again, I’m surprised that anyone was surprised by this scandal. It’s been clear for several decades to anyone willing to see and hear that these sorts of schemes have been going on for a long time. Well, hopefully someone will have plenty of time on their hands to “get educated” about the issues from inside a correctional institution.

That’s all for now. Have a great weekend, and be on the lookout for some exciting format and layout changes arriving soon!

FRAUD FRIDAY: SCOTUS Gives the SEC its Groove Back, Crypto-fraud Arrest, Sleeping on the (State) Job

Apologies for my extended absence from the proverbial blogosphere. It was a combination of circumstances, none of which would be particularly interesting to anybody, so we’ll just say I’m glad to be back amongst the digital proles, where I belong. Lots going on in the World of Fraud, so let’s get after it…


Supreme Court Widens Scope for Fraud Claims

Last week, the Supreme Court ruled in favor of the Security and Exchange Commission’s (SEC) growing sentiment to expand the horizons of rules that dictate who may be held liable for fraudulent activity.

The opinion was a conclusion of the court’s investigation of the Lorenzo v. SEC case, where the agency argued that the defendant, Francis Lorenzo, is liable for disseminating a note falsely claiming to investors that a prospective company’s assets are worth more than $10 million, while being aware that they were in fact worth under $400,0000.

The SEC has been on a years-long losing streak, essentially getting its butt handed to it every time it enters an appelate or higher courtoom. Things have gotten so bad that some journalists are concluding, rather convincingly, that we essentially no longer prosecute white collar crimeChief Investment Officer Online

The Lorenzo case is a much-needed win and morale booster for the SEC folk. It’s no fun losing all the time – just ask the Cleveland Browns or the Baltimore Orioles!


Shady Characters Arrested for Running Cryptocurrency Pyramid Scheme. Also, Water is Wet

Cryptocurrency scams are nothing new, but they’re rarely as large as this. US law enforcement has arrested Konstantin Ignatov over a fraud charge relating to OneCoin, the cryptocurrency he helped found. Ignatov, his sister Ruja Ignatova (also charged, but hiding) and others allegedly orchestrated a “multibillion-dollar pyramid scheme” where people received commissions for persuading people to buy OneCoin packages that themselves were junk. OneCoin reportedly rigged prices, sold people non-existent coins and didn’t even have a true blockchain to manage the currency.”  Engadget

Gee, who could’ve thought that this wasn’t legit? It’s got all the signs of a transparent, cleanly-owned-and-operated Eastern European mega-grift pyramid scheme. These guys DIDN’T EVEN HAVE A BLOCKCHAIN. They were basically just updating the age-old game of trying to not be the last person holding the (empty) bag. The more I learn about cryptocurrentices, the less like legit alternatives to “fiat” currencies they seem. It’s the 2019 version of the Nigerian 419 scam, and I have to ask myself essentially the same question: WHO in their right mind gets a call from a sketchy international phone number or a pitch email from some weird domain like @Theft.Biz and says “Sure. This sounds fantastic, give me a few days to make an early withdrawl from my Roth account & I’ll wire the money to you there at the Bank of Eastern Vampiristan. What could POSSIBLY go wrong?”


Ahhh, Memories: Investigations of Improper Activities by State Agencies and Employees

My first audit shop was the California State Auditor, under the superlative leadership of the legendary Elaine Howle. After a couple of years of stumbling around as a baby auditor and managing not to get fired, I was lucky enough to be selected for the Investigations Unit, which turned out to be one of the best professional moves that could have happened to me. I learned so much from the seasoned pros in the I-Unit, had a ton of fun, and helped the state identify, save, and recover a not insignificant amount of dough. While the I-Unit answers well over 5,000 calls and emails per year, much of the unit’s activity is summarized in a twice-yearly summary report, always titled as some close variation of the title above. There’s so much more that goes on that the public knows nothing about, and even when the results of investigations and audits are made public, there’s always a ton of allegations that are probably true, but are left on the editing room floor because, you know, ALIENS made me fall asleep at work for several years. Really. They even killed my hamster and “arranged it in in a sacrificial manner on my living room carpet.” (absolutely true story, I swear)

Anyhow, the CSA just released the latest I-summary, and as always, it’s entertaining reading:

“California state employers cost the state tens of thousands of dollars in wasted funds by leaving work early, misusing leave time and in one case literally sleeping on the job.
That’s the finding of a new report from California State Auditor Elaine Howle, which examined more than 800 whistleblower complaints between July and December of 2018.The auditor found that 30 employees, in eight departments, cost the state an estimated $150,000 in taxpayer money.” Sacramento Bee

That’s all for now, kids. Keep on fighting the good fight!

 

Turkey Tuesday Fraud Roundup, a Cornucopia of Misdeeds and Malfeasance

Greetings, Gentle Readers!

As many of you know, we normally post on Fraud Fridays. However, because many of you will be busy this upcoming Friday (despite your urges, please don’t punch that 75-year-old woman who grabbed the last inflatable Baby Jesus right out of your hands at the Big Box store – there will be plenty more blow-up nativity scenes imported from China, I promise), and Wednesday is Dante’s previously unnamed Tenth Circle of Hell, aka Travel Day, that it might be more convenient to post today.

Enjoy stuffing your face, watching football, visiting relatives, & don’t forget to remind your racist uncle that Thanksgiving is a lie.  That should make for fun conversation ’round the family holiday table!


  1.   Ghosn, Ghosn, Gone: Nissan Exec Arrested Over Financial Misconduct

    You know it’s bad when they *arrest* the Big Guy at a politically-connected multi-billion global corp. – CNN Business
  2. New, Improved 1MDB Scandal – Now With More Vampire Squid: The 1MDB Scandal Moves Apace

    So, Goldman Sachs helped Former Malaysian Prime Minister Hajib Razak steal and launder hundreds of millions, if not billions of dollars? I’m shocked, shocked I tell you! ACFE Insights Blog

  3. A Few Billion Shekels Here, A Few Billion Shekels There, & Pretty Soon, We’re Talking About Real Money: Israeli Police Say Minister Should Be Charged With Fraud

    Police spokesman Micky Rosenfeld said there is an ‘evidentiary basis’ that Aryeh Deri committed fraud and breach of trust, as well as millions of shekels in tax offenses and money laundering, and the disruption of court proceedings.

    Police have questioned Deri and his wife on suspicion of receiving illicit payments from businessmen. They deny any crimes were committed.

    Deri was previously sentenced to three years in prison for bribery, fraud and breach of trust in 2000 during his previous stint as interior minister in the 1990s. He served 22 months in prison but made a political comeback and retook the reins of the ultra-Orthodox Shas party in 2013.” – Associated Press

  4. To Serve & Protect (Herself): St. Johns County Sheriff’s Office Finance Director Arrested for $700,000 Fraud Scheme

    It never ceases to amaze me that vendor-fraud schemers use readily identifiable names and addresses for their fake vendors. I guess Narcissistic Personality Disorder comes with it’s own built-in weaknesses. WOKV Radio, Jacksonville, FL

  5. Nothing is Easier to Spend Than Someone Else’s Money: University of Louisville Foundation audit ‘paints disturbing picture’ of excessive spending and attempts to conceal truth
    Under former University of Louisville President James Ramsey, the U of L’s nonprofit foundation depleted the university’s endowment to fund excessive spending on things ranging from compensation to real estate to football tickets, according to special audit released Thursday.

    And, emails revealed in the audit show Ramsey’s former chief of staff, Kathleen Smith, ‘expressed an interest in concealing’ the foundation’s more-than $20 million in extra compensation from public records and journalists, according to the report.

    In 2014, for example, Smith told the foundation’s outside attorney that an obscure name was needed for the foundation’s new subsidiary company that handled deferred compensation – to make it ‘difficult to figure out for (the) media.'” – WDRB TV, Louisville, KY


    Food Recommendation: You haven’t lived until you’ve had some spectacular, delicate Povitica (aka Kolachi, Strudel, etc.) from the Strawberry Hill Bread Co. 

    Music Recommendation: An excellent live album from simply the best singer-songwriter in the business today, along with his crack band. Jason Isbell and the 400 Unit – Live From the Ryman captures a group of musicians at their creative peak, pushing the boundaries of musical genres.

     

 

Fraud Friday: All The Queen’s Horses

It’s not too often that us auditor/fraud investigator/forensic accountant-types find ourselves in the bright light of mainstream celebrity. In a way, our entire collective professional identity is primarily as anonymous bean-counting corporate drones. We even revel in it, and use it to our advantage when trying keep an ultra-low profile during an investigation.

Really, accountants and auditors tend to only make the news when it’s BAD (here’s looking at you, Arthur Anderson). To be fair, the ACFE and their wonderfully named trade magazine, FRAUD, is full of stories of intrepid, tenacious defenders of truth, justice, and the American Way, but let’s face it: Nobody but us reads those stories.

The closest I’ve seen any frauditor-types come to mainstream celebrity is Harry Markopolous, the kick-ass CFE who unearthed the Bernie Madoff Ponzi scheme, which remains the largest confirmed Ponzi/Pyramid-type fraud scheme in world history, with estimates of up to $100-billion dollars stolen (although Mr. Markopolous insists that at least $35 billion of that figure consists of fictional profits that Madoff reported, but that never really existed). Regardless, I highly recommend Mr. Markopolous’ fantastic book about the Madoff scandal, No One Would Listen.

But now we’ve got a new contender for fraud-world celebrity, such as it is: Kelly Richmond Pope, PhD., CPA:

KRPope
Source: https://www.allthequeenshorsesfilm.com/filmmakers/

Dr. Pope, in addition to being a professor of forensic accounting, ethics and leadership, and managerial accounting at DePaul University, is a self-described “Left-handed CPA who uses filmmaking to teach people about decision-making.” I recently had a chance to attend a private showing, of her latest documentary film, All The Queen’s Horsesand it is remarkable. It may be the single best documentation of the complex psycho-social web that surrounds every fraud scheme.

You may remember the surreal headlines coming out of the sleepy small-town of Dixon, Illinois in 2012:
Crundwell Indictment Press Release
Source: FBI press release, 5/1/12

“Financial controls in Dixon were the ‘perfect storm of embezzlement,’ an expert says”
Chicago Tribune

“Woman accused of bilking $53 million from Reagan’s boyhood hometown”
Reuters

The story seems utterly banal: Small-town has poor-to-non-existent internal controls in its municipal government operations, and a long-time employee sees an opportunity for malfeasance and takes it. But this case is really something else – Rita A. Crundwell, the long-time town controller, stole AT LEAST $53 million over a period of twenty years. This from a small farming community of less than 16,000 people.

Dr. Pope began working on the film shortly after Ms. Crundwell’s arrest in 2012. Recognizing that there was a compelling story beyond just the dollar amount in this case, Pope and her production team took six years to ensure that the entire tale was told – from Rita Crundwell’s humble and quasi-idyllic childhood, all the way through arrest, indictment, and sentencing and the subsequent human, political, and economic aftermath.

I think what I found so compelling about All The Queen’s Horses was how well the film captures the emotional roller-coaster that whistleblowers find themselves on, and the ripples of fallout that affect people far beyond the primary participants in the saga.

Narrated by Dr. Pope in a crisp, entertaining style, the film intersperses dozens of interviews with experts and laypeople, politicians and taxpayers, academics and activists, while also taking an educational approach, with numerous animated info-graphics and concurrent storylines.

A key theme that emerges is that Rita Crundwell could never have pulled off the largest municipal fraud in U.S history without a number of unwitting assistants. It’s a textbook case of failure of multiple lines of defense against fraud: A bank that fails to adhere to anti-money-laundering procedures. A good-ol-boy city council that was asleep at the wheel. Dozens of colleagues, friends, and family members that never seriously questioned Rita’s expertly delivered but suspicious cover stories. And a global audit firm that failed their fiduciary duty to their client (the City of Dixon), that their shame (and liability) should be infinite. It’s all quite a tale, told in a fast-moving and entertaining 1 hour, 10-minute film that is very well-produced.

Most of all, All The Queen’s Horses serves as a vivid reminder that every entity involving humans is susceptible to fraud in all its forms. The thing I keep going back to when thinking about the film is the fundamental decency of virtually everyone in Dixon. Hard-working, honest, charitable, polite folks. The proverbial salt-of-the-earth-midwesterners that I’ve come to know and love after living in Kansas for nearly a decade. These folks trusted Rita Crundwell with their tax dollars. She stole nearly all of it, and roads, sidewalks, buildings, and other public infrastructure in Dixon steadily decayed. Kelly Richmond Pope captures the pain and betrayal that these folks feel, and their confusion and angst at realizing that it was “one of their own” that did it.

All The Queen’s Horses is available on all major streaming platforms, and has been one of the most-watched documentary films of the past two years on Netflix, iTunes, Amazon Prime Video, and Google Play.  I highly recommend taking the time to watch it and research the story and the film!


Music Recommendation: Nathaniel Rateliff & The Night Sweats, Live at Red Rocks A tasty stew of blue-eyed soul, greasy garage-band rock-n-roll, and classic R&B, along with an assist from the amazing Preservation Hall Jazz Band of New Orleans. A new favorite – highly recommended!

Food Recommendation: The short-rib griller sandwich at Q39, Kansas City Pitmaster Rob Magee’s incredible restaurants in Kansas City and Overland Park, Kansas. This thing is worth getting on an airplane for – trust me. Truly sublime. Magee’s Q39 has rapidly ascended the ultra-competitive KC BBQ ladder.

How to Waste $341,000 (Hint: Certainly Not by Flying Coach with the Proletariat)

I love the Federal Inspectors General. They are truly doing valuable, important oversight work. Sometimes the dollar amounts they oversee are absolutely mind-boggling. When I was a baby auditor at the venerable office of the California State Auditor, working under the guidance of the truly competent Elaine Howle, CPA, I once caught a $527 million dollar journal entry in a state agency’s general journal that had been mistakenly entered as a debit instead of a credit. When we contacted the agency, their budget was so large that they didn’t even realize the error because it wasn’t material!

Anyway, at the federal level, the numbers run into the TRILLIONS overall. Hard to grasp that large of a number. The 73 IG offices in the civilian government, along with the numerous military IG offices, perform some of the most demanding, complex, politically incendiary audits and investigations on the planet. However, sometimes it’s not the size of the numbers that the IG reports, it’s the overall meaning and reputational effect of a specific report. Take, for example, the freshly-released HHS IG report on the travel habits of (former) department secretary Tom Price.

Mr. Price did not like to fly with the rest of us, it would appear. Thus, he thought it appropriate to charter aircraft or order military aircraft to transport him and his lackeys  staff around our great nation. Turns out – SURPRISE – that was improper, and the IG says Mr. Price should pay $341K to the U.S. Treasury. We’ll see how that turns out, but the main point remains: Organizations are profoundly affected by management culture, the much-studied “tone at the top.” A culture of lawlessness and disregard for policies & procedures is inevitably toxic for an organization. In addition, such a high-profile example of blatant graft greatly erodes public trust in government – at all levels. Most citizens don’t really understand that the federal government isn’t responsible for remodeling their local school building, but in their mind, they lump it all together, and overall trust plummets. That’s why, while there is a certain schadenfreude at seeing such an epically arrogant “public servant” be taken to task by the Inspector General, in the end, we all suffer for the behavior.

From the L.A. Times:

“Former Health and Human Services secretary Tom Price should repay the federal government more than $341,000 for improperly using charter and military aircraft for travel for himself and his wife, a new report from the agency’s independent Office of the Inspector General has concluded.

“The Office of the Secretary improperly used federal funds related to former Secretary Price’s government travel,” said the report, released Friday. Auditors found that 20 of the 21 trips that Price took during his brief tenure as secretary in 2017 did not meet federal requirements.

Price, a conservative Georgia congressman and friend of House Speaker Paul D. Ryan (R-Wis.) whom President Trump tapped to lead the health agency, was forced to resign last September after reports by Politico outlined his extensive use of charter and military aircraft for routine travel domestically and around the world.

Many of the flights were between major U.S. cities served by much cheaper commercial airlines.

 

After the scandal broke, Price said he would repay a portion of the costs.

But the Office of Inspector General recommended that the health agency recoup an additional $341,616 from Price, who is now serving on the advisory board of Atlanta-based Jackson Healthcare.

The inspector general estimated that the government spent nearly $1.2 million on Price’s travel during his seven months in office. That included more than $700,000 in military flights on two foreign and two domestic trips, as well as more than $480,000 for various domestic trips by private chartered aircraft.

In a formal response, HHS agreed with most of the inspector general’s recommendations for tightening up official travel and requested details on the $341,000 that investigators said the government should recoup.

An HHS spokesperson said the agency would ask the Department of Justice’s Office of Legal Counsel to review whether there is a legal basis to recoup the money.

Nicholas Peters, a spokesman for Price, suggested in a statement that the costly travel was the result of “good faith mistakes” by HHS staff.

Peters would not say if the former secretary will repay the taxpayer money that the inspector general says should be recouped.

Senior Democrats on Capitol Hill, meanwhile, redoubled their criticism of the former health secretary.

 

“This report confirms Tom Price’s role as the poster child for the rampant waste of taxpayer dollars that has occurred on Trump’s watch — all while he was pursuing dangerous policies that increase families’ premiums and weaken their healthcare,” said Oregon Sen. Ron Wyden, the senior Democrat on the Senate Finance Committee.

Wyden was among many Democrats who opposed Price’s nomination, citing among other things revelations that while a congressman, Price had traded extensively in the stocks of healthcare companies that could have been affected by his votes and actions.

Extravagant spending on travel and office remodeling by top officials became a running story as the Trump administration took power in Washington on a presidential promise to “drain the swamp.”

 

Price was forced out in the fall of 2017 after his travel drew the ire of President Trump, who was also upset over the GOP failure to repeal Obamacare.

A successful orthopedic surgeon before winning a congressional seat from the Atlanta suburbs, Price rose to become one of the top GOP experts on budget and healthcare issues. But as secretary of HHS, he never produced a healthcare plan to “repeal and replace” the Affordable Care Act.

 

Among other findings from the report:

— Investigators questioned Price’s assertion that his official schedule prevented him from flying commercial. In one case a White House event cited as justification was cancelled, and Price’s office chose to continue with a charter flight at a cost of nearly $18,000.

— Even among charter flight options, Price’s office did not always book the lowest-cost trip. In one case the difference between quoted options amounted to nearly $46,000.

— For six trips, Price either started or ended his travel in his home state of Georgia, his most frequent charter travel destination outside of his official duty station in Washington, D.C.

— HHS paid more than $11,500 on commercial flights for a Price trip to China, Vietnam and Japan. But Price ultimately flew on military transport at a cost of more than $430,000 and HHS lost track of what it spent for the commercial airline ticket until the inspector general’s investigators identified the expense.”

 


Music RecommendationSend Me An Omen from The Magpie Salute. An excellent deep-fried southern rocker in the vein of the Allman Brothers Band/Govt. Mule. Chris Robinson of the Black Crowes is the band leader, and he’s got quite a capable cast of players behind him on this. Can’t wait to hear the full new album.

Food Recommendation: Speaking of Southern goodness, I must admit that one of my guilty pleasures is southern food in all its butter-soaked-and-rolled-in-bread-crumbs glory, and Trisha’s Southern Kitchen, a Food Network show hosted by the always-lovely Trisha Yearwood has plenty of Southern goodness, along with some nicely-updated modern recipes.

Fraud Friday: Catch Me If You Can, or How I Learned the Value of Hard Work From The Best Confidence Man Of All Time

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Greetings, fellow fraud-nerds! Today, as it is midsummer, and ’tis the season for travel, family vacations, and stolen tourists credit cards, I thought that rather than highlight current news in the fraud investigation and audit universe, we could take a fun look back at one of the true characters in the long and storied dance between the perpetrators and the investigators who doggedly pursue them.

Most of you are at least passingly familiar with the remarkable story of Frank Abagnale, Jr., aka “The Catch Me If You Can Guy,” aka the highly successful business fraud consultant, aka the greatest check washer of all time. For those of you who are unfamiliar, or if you want to do a deeper dive and read a great book, we highly recommend Frank’s autobiography (with co-author Stan Redding). It’s an entertaining and revealing read, if a bit dated in terms of fraud scheme logistics, but the social engineering principles remain as relevant as ever. They don’t call them “Confidence Men” for nothing!

Of course, Abagnale’s big break into pop culture came when Steven Speilberg and Tom Hanks adapted the autobiography into the hit film of the same name. It’s a highly stylized, gauzy retrospective look back at the idealized jet set of the 1960’s. Leonardo DiCaprio plays our antihero with relish, and Tom Hanks is perfectly cast as the stereotypical tireless gumshoe investigator, playing a human game of cat-and-mouse across the globe. It’s worth owning the blu-ray for the extras – including additional background and some cool FBI investigative documentary footage. But the book and movie are not what I want to focus on today. Rather, I want to highlight the value of persistence, determination, and plain old hard work.

I’ve attended a couple of lectures with Abagnale. These talks are Abagnale’s bread-and-butter, and you can video of many of them online. His “Talks at Google” episode is particuarly good. What’s interesting about Abagnale, and what makes him so different from a lot of the “reformed fraudster” lecture set is that he openly admits that he’s not “reformed” or “cured” in any way. He’ll straight-up tell you that he’s not necessarily a changed person, he just chooses not to use his talents for illegal activities. It’s remarkable when you see him tell a room full of fraud investigators, attorneys, and law enforcement that he’s still the same con man he always was.

But what is also remarkable, and sets Frank Abagnale, Jr. apart is his sheer work ethic. When he was washing checks, it was all he did. Nothing else. He set out to become the best check-washer in the world, and by most accounts he was. He was obsessive about learning and mastering the details of his craft, illegal though it might have been. This is one of the things that the movie gets correct, in my opinion. DiCaprio’s Abagnale is obsessive to the point of madness, which, though it may not be mentally healthy, did create a form of excellence in him.

That’s one of the key takeaways of Abagnale’s talks – if you work incredibly hard at something, you WILL get good at it. You may not be the best, but you’ll eventually become competent. He said that the only reason the FBI caught him was that he was finally pitted against an agent who was as obssessed with catching his man as Abagnale was in staying on the lam and living large. (Note: Carl Shea – Hanks’ version of Shea in the film is Carl Hanratty – is the real life FBI agent, and him and Abagnale are now friends and sometimes do seminars/speeches together).

There’s no shortcut: If you want to master anything, you have to be a bit obsessive about it. That may not go over well in the era of “work/life balance” and the foreign (to me) concept of “self-care.” If you put in the hard work and the long-term effort, nobody will be able to catch YOU.

Have a great weekend!

Fraud Friday: Fyre Festival Fraud, Bumblebee Tuna Price-Fixing, Barclays Bank’s $2-Billion Fine

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Lots to get to on the first Fraud Friday of the summer, so let’s get to it…

Fyre Festival Founder Billy McFarland Has Been Arrested Again on Additional Fraud Charges

The promoter of a failed music festival in the Bahamas who is awaiting sentencing on fraud charges was arrested on new fraud charges Tuesday, leading a judge to order his detention.

Billy McFarland, 26, will remain behind bars until a judge, who is scheduled to sentence him next week in the festival case, decides whether he can be freed on bail.

McFarland pleaded guilty to wire fraud charges in March in a deal that called for him to serve between eight and 10 years in prison, although he has requested leniency with no incarceration. The plea pertained to the bungledspring 2017 Fyre Festival on the Bahamian island of Exuma that cost over 80 investors a total of $26 million.

The festival was anything but the ultra-luxurious event promoted as “the cultural experience of the decade” and touted on social media by Kendall Jenner, Bella Hadid, Emily Ratajkowski and other models and celebrities.

Assistant U.S. Attorney Kristy Greenberg called McFarland a financial threat to the community, saying he’d used the client list of the Fyre Festival to pitch a new ticket fraud that promised tickets to music, fashion and sporting events that he didn’t possess and had no way of getting…

Prosecutors said over 15 victims had been bilked since late last year of more than $100,000 as McFarland and his workers sold non-existent tickets to the 2018 Met Gala, Burning Man 2018, Coachella 2018, the 2018 Grammy Awards, Super Bowl LII and a Cleveland Cavaliers game that would include a team dinner with Lebron James.

Greenberg said McFarland was living lavishly with monthlong stays in luxury hotels and excursions to expensive restaurants. And he’d told his workers that he would flee if he is sentenced to over three years in prison next week, she said.

“The weight of the evidence here is quite strong,” Greenberg said. “He targeted the same victims who tried to attend his Fyre Festival.”

She said prosecutors were considering additional charges including bank fraud and an identity theft charge that would carry a mandatory two-year prison sentence upon conviction.

“Mr. McFarland is a serial fraudster, plain and simple,” Greenberg told Gorenstein. “Mr. McFarland is looking at a significant term of imprisonment.”…

Gorenstein, noting that McFarland would likely face an additional two years or so in prison if he is convicted in the new case, said that if he is freed on bail in the Fyre Festival case, he’ll face a $1 million bail on the new charges. – Associated Press via Time Magazine

“Nobody ever lost a dollar by underestimating the taste of the American public” – P.T. Barnum


Bumble Bee tuna price-fixing case, like Starkey fraud prosecution, could change white-collar prosecutions

When the roll call is sounded of business deals that looked like a good idea at the time but went massively wrong, special notice should go to the merger of the tuna packagers Bumble Bee and Chicken of the Sea, announced in late 2014.

The $1.5 billion deal would have created a canned tuna powerhouse¹ commanding nearly half of the U.S. market, swamping StarKist, which at the time was the No. 1 brand with 34.6 percent.

The deal never happened.

In conducting a routine antitrust review of the proposed deal, the Department of Justice unearthed what looked like a massive conspiracy among the three companies to fix canned tuna prices.

The parent of Chicken of the Sea, a Thai company named Thai Union Group, promptly bailed out of the merger and fessed up to the Justice Department in return for amnesty from prosecution. Its deal requires it to cooperate with the government’s investigation of the other two companies.

Two top executives of San Diego-based Bumble Bee and an executive of StarKist pleaded guilty to federal price-fixing charges in 2016 and 2017 and turned state’s evidence; their sentencings have been deferred at least to Sept. 26, when their cooperation can be assessed. Bumble Bee pleaded guilty to price fixing last year and agreed to pay a fine of at least $25 million and as much as $81.5 million (the higher amount if the company is eventually sold).

So far, 78 civil lawsuits have been filed against the three tuna companies and consolidated into a single proceeding before federal Judge Janis Sammartino in San Diego. They fall into four categories: three class actions for groceries and wholesalers, consumers, and food preparers such as delicatessens; and a fourth group of big tuna buyers such as Walmart and Sysco.

The Justice Department says the alleged collusion lasted from 2011 at least through 2013; some civil plaintiffs say it continues to this day. The lawsuits don’t specify how much the companies allegedly squeezed from consumers by colluding. U.S. canned tuna sales, however, come to between $1.7 billion and $2 billion a year.

Then, on May 16, came the federal indictment of Bumble Bee’s longtime chief executive, Christopher Lischewski.

The Lischewski indictment is what elevates the Bumble Bee investigation into a special category of white-collar crime cases, for he’s one of the rare CEOs to be brought to book in recent years for corporate wrongdoing.

Lawyers were monitoring the local prosecution of Starkey Technologies former executives for the same reason — a change in policy during the Obama administration making it easier to prosecute individual company officials.

Before, the Justice Department had moved away from prosecuting individual executives in favor of extracting criminal pleas, fines and civil settlements from their corporations. That policy reached its climax in the aftermath of the 2008 financial crisis, when top executives of big banks seen to have defrauded investors and customers averted prosecution.

Presumably responding to criticism about executives going free, the Obama-era Justice Department issued a new policy in 2015 over the signature of then-Deputy Attorney General Sally Yates. The “Yates memo” stated that it would henceforth be a priority in corporate misconduct cases to seek “accountability from the individuals who perpetrated the wrongdoing.”

Investigations should focus on individuals from the start, the memo said, and corporations wouldn’t get credit for cooperating with the government unless they fingered individual wrongdoers.

That was proper, because “almost invariably, white-collar crime comes from the top,” said William K. Black, a former bank regulator who brought cases in the 1980s against numerous individual executives in the wake of the savings and loan crisis.

But it did complicate prosecutions. That’s because “individual responsibility in huge corporations can be very diffuse,” says Henry Pontell, a white-collar crime expert at John Jay College of Criminal Justice and UC Irvine. “It’s possible in a large organization that a CEO may not know who’s doing what.”

Moreover, “going after individuals is harder — they will put up a defense because they face real consequences,” Anello said in an interview. By contrast, “companies look for ways to resolve cases.”

It took two years to build the cases against former Starkey President Jerry Ruzicka, who along with a business associate, was found guilty of fraud.

The number of white-collar cases as a whole has been decreasing since 2011, and the Trump administration has signaled a shift from corporate prosecutions to immigration cases in the federal system, making it likely that fewer of these types of cases will see the courtroom, according to an article in the New York Law Journal last February by white-collar defense attorneys Robert J. Anello and Richard F. Albert. Immigration charges have accounted for 53 percent of all federal prosecutions so far this year, according to TRAC, and drug charges an additional 32 percent.

The individual guilty pleas in the tuna cases, experts said, suggest that the government must really have the goods. Certainly, the circumstantial evidence is strong. According to the indictments and civil lawsuits, the three big processors had emerged from an era of ferocious competition for market share from 1985 to 1999, when more than half the canned tuna sold in the U.S. was subject to promotions that discounted prices by as much as 31 percent. – Minneapolis Star-Tribune

¹ “Canned Tuna Powerhouse” is an excellent name for a cover band. Just sayin.’


Barclays agrees to pay $2bn to settle US fraud case

Barclays has agreed a $2bn (£1.4bn) settlement with the US justice department over the sale of mortgage-backed securities in the lead-up to the 2008 financial crisis.

The settlement follows a three-year investigation into allegations that the bank caused billions of dollars of losses to investors by “engaging in a fraudulent scheme” to sell Residential Mortgage-Backed Securities (RMBS) between 2005 and 2007.

The British bank was said to have misled investors about the quality of the mortgage loans backing those deals.

The justice department alleged violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, based on postal, wire and bank fraud as well as other misconduct.

Two former Barclays executives have also reached a settlement. Paul Menefee, who served as the lead banker of its subprime RMBS securitisation unit, and John Carroll, who worked as the head trader for subprime loan acquisitions, will pay a total of $2m.

Richard Donoghue, US attorney for the eastern district of New York, said: “This settlement reflects the ongoing commitment of the Department of Justice, and this office, to hold banks and other entities and individuals accountable for their fraudulent conduct.

“The substantial penalty Barclays and its executives have agreed to pay is an important step in recognising the harm that was caused to the national economy and to investors in RMBS.” (Translation

The fine is less than City analysts had expected and less than the penalties paid by other foreign banks facing similar claims. In December 2016 Credit Suisse paid $5.3bn as a settlement and to consumers. Deutsche Bank settled at $7.2bn a month later. At the time Barclays said it would not settle and the justice department launched legal proceedings.

The department’s complaint involved 36 residential mortgage-backed security deals, which made $31bn of subprime and Alt-A loans tradable on the market.

The department alleged that the borrowers whose loans backed those deals were “significantly less trustworthy” than Barclays made them out to be. In addition, the mortgaged properties were “systemically worth less” than what had been presented to investors. 

Ultimately more than half of those loans defaulted.

Barclays said the settlement resolved “all actual and potential civil claims” by the justice department relating to securitisation, underwriting and sale of mortgage-backed securities in the period 2005-2007.

Jes Staley, its chief executive – who was not at the bank at the time of the RMBS sales – said: “I am pleased that we have been able to reach a fair and proportionate settlement with the Department of Justice.” (Translation: Really glad you suckers allowed me to pay you off with shareholder money and avoid any personal responsibility!)

The settlement comes nearly a month after Barclays confirmed a loss of nearly £2bn last year, after a string of hefty charges, including a £900m hit from Donald Trump’s corporate tax changes and £127m from the collapse of the outsourcing and construction firm Carillion. It also racked up £2.5bn of losses from the sale of Barclays Africa.

Pre-tax profits rose 10% to £5.3bn for 2017, but the bank reported an after-tax loss of £1.9bn. It made a profit of £1.6bn in 2016. 

Staley said: “The completion of our restructuring in 2017, and putting significant legacy matters like this one behind us, mean Barclays is well positioned to produce stronger earnings going forward, and to start returning a greater proportion of those earnings to our shareholders over time.”

As a result, Barclays still intended to pay a dividend of 6.5p for 2018, he added. Barclays shares edged down after the announcement.

What’s the line from the Talking Heads song? “Same as it ever was”

No food or music recommendations this week, because it just doesn’t feel right when there are kids locked in cages in the name of securing the Republic…

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